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ECONOMICS:
EXPLORE & APPLY
by Ayers and Collinge
Chapter 22
“Market for Labor
and Other Inputs”
©2004 Prentice Hall Publishing
Ayers/Collinge, 1/e
1
Learning Objectives
1. State why the demand for labor is derived
demand.
2. Use labor demand and supply curves to show
how an equilibrium market wage rate is
determined.
3. Discuss the characteristics of a purely
competitive labor market and the wagetaking firm.
4. Ascertain the profit maximizing employment
of labor for a wage taking firm.
©2004 Prentice Hall Publishing
Ayers/Collinge, 1/e
2
Learning Objectives
5. Describe labor markets in which market
power over the wage rate is present.
6. Relate the similarities between the
employment of labor and the employment of
other resources.
7. Explain why the employment of labor has
become increasingly global in scope.
©2004 Prentice Hall Publishing
Ayers/Collinge, 1/e
3
22.1
THE MARKET DEMAND FOR LABOR
• Unlike the product market, in which
firms are sellers and households are
buyers, in the labor market, individuals
sell their labor services (suppliers) to
firms (demanders).
• The market price of labor services is the
wage rate, the amount the employee is
paid per hour.
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The Market Demand for Labor
A Derived Demand
o Labor demand slopes downward,
meaning that….
o Higher wage rates decrease the
quantity of labor demanded.
o Whereas, lower wage rates increase
the quantity of labor demanded.
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Labor Demand
Wage Rate
($)
The lower the wage,
rate, the larger the
quantity of labor
demanded.
$9
$7
Market Demand
3,000
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4,000
Quantity of Labor
(hours per day)
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Variation in the Demand
for Labor
Economist often study the labor demands
In three distinct labor market segments.
oOccupation: occupational labor demands are
distinct for dissimilar because labor
occupations require specific human capital.
oGeography: labor demand varies
geographically because of different economic
conditions in towns and regions.
oIndustry: various industries compete for the
same pool of workers.
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Derived Demand
Labor demand is a derived demand,
which means that the demand for labor
exists only because there is a demand for
labor’s output.
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Labor Demand
Wage
Rate ($)
Market Supply
$9
The higher the wage,
rate, the larger the
quantity of labor
supplied.
$7
4,000
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5,000
Quantity of Labor
(hours per day)
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Market for Labor
 Workers exchange their services to the labor
market in exchange for the wages and salaries
that they can earn.
 The market supply curve of labor shows the
quantity of labor supplied at various wage
rates.
 The positive slope of the market supply of labor
tells us that higher wage rates attract a greater
quantity of labor supplied.
 Labor supply can vary by occupation, area,
and industry.
©2004 Prentice Hall Publishing
Ayers/Collinge, 1/e
10
Market for Labor
Wage
Rate ($)
$9
$7
At $9, there would
be a 2,000-hour
surplus of labor.
•
•
•
Market Supply
Labor market
equilibrium
Market Demand
3,000 4,000 5,000
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Quantity of Labor
(hours per day)
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22.2
THE EQUILIBRIUM WAGE RATE
A purely competitive labor market exist
when the demand for labor and the
supply of labor establish an equilibrium
wage rate and quantity of labor.
The characteristics of a purely
competitive labor market are….
Many buyers and sellers of labor services
Services of labor are homogeneous
Market is free of barriers to entry and exit
©2004 Prentice Hall Publishing
Ayers/Collinge, 1/e
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A Purely Competitive Labor
Market
In a purely competitive employers are
wage takers.
They can employ as much or as little labor
as they desire, at the market wage rate.
No one employer can influence the wage
rate, so as wage takers, they have no market
power over wages.
For a wage taking firm, the wage rate is
supply curve of labor to the firm.
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Competitive Labor Markets
Labor Market
Firm
Market
Supply
The horizontal supply curve of labor to an
employer indicates the employer is a wage
Labor Supply
taker in a purely competitive labor market.
to Firm
Market
Wage
The interaction of labor
demand and labor supply sets
the market wage.
Total market
labor
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Market
Demand
Labor (thousands)
The firm’s demand for labor
Firm’s
will determine the quantity
of
labor it hires at that wage.
Demand
Labor to
Firm
Labor (single units)
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A Firm’s Employment of Labor
The value to the firm of any worker’s labor, pat
is a revenue resulting the from that worker’s
marginal product.
The revenue from the output an additional
worker adds to the firm’s total output is termed
the marginal revenue product of labor.
Marginal revenue product =
Change in total revenue/Change in labor
Or
Marginal revenue x Marginal product.
©2004 Prentice Hall Publishing
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A Firm’s Employment of Labor
Marginal revenue product =
(change in total revenue ÷ change in labor )
= (marginal product x marginal revenue)
25
20
Marginal revenue product
15
Marginal revenue product
is downward sloping for a
price-taking firm due to the
decrease in the marginal
product of labor.
10
5
0
0
1
2
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3
4
5
6
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Marginal Revenue Product
A Price Taker
#1 the
Marginal
marginal
revenue
product
ofslopes
laborin order to sell the
#2 price
mustproduct
be
decreased
downward
decreases
as
foroutput
the
a price
quantity
maker
for
labor
TWO
is when more
additional
that
isofproduced
reasons.
increased.
labor is employed. The decrease in price, which
results in less marginal revenue, also contributes
to the decrease
in marginal revenue product.
Marginal
revenue product
$
60
50
40
30
20
10
0
-10
0
1
2
3
4
5
6
Quantity of Labor
-20
-30
-40
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Hiring Labor
 Marginal cost of labor: The additional cost of
employing one more unit of labor.
Marginal cost of labor =
Change in total cost/Change in quantity of labor
 The market wage rate equals the marginal cost
of labor for a wage taker.
 Profit-maximizing firms will hire to the point
where (Hiring Rule):
MCL = MRPL
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Marginal Revenue Product
and the Demand for Labor
The quantity of labor employed by a
profit-maximizing firm is the amount
for which marginal revenue product =
marginal cost of labor
16
(= market wage)
•
Marginal Cost
of Labor
Marginal Revenue
Product
3
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Quantity of Labor
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Employment of Labor and
the Output Market
Marginal Revenue
Product for price maker
16
(= market wage)
•
2
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•
3
The greater the ability of the firm to
set
price
in its
market,as
the
Both
firms
areoutput
wage takers,
steeper
willbybethe
itshorizontal
marginal revenue
indicated
supply
product
curve ofcurve.
labor.A price taker will
employ more labor than a price
maker, other things equal.
Marginal Cost
of Labor
Marginal Revenue
Product for price taker
Quantity of Labor
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22.3
MARKET POWER IN THE LABOR
MARKET
 Monopsony - only one employer of labor
 Monopoly - only one seller of labor, a
labor union
 Bilateral monopoly - only one employer
and only one seller of labor
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A Monopsony Firm
 The monopsonist makes its hiring
decisions in the following two steps.
 It employs the amount of labor for which
the marginal cost of labor equals the
marginal revenue product.
 It pays the lowest possible wage rate for
that labor.
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Monopsony Firm and UpwardSloping Supply of Labor Curve
Marginal Cost
of Labor
10
Step 1
Supply of
Labor
9
8
Step 2
Marginal
Revenue Product
3
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Labor
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Monopoly – A Sole Supplier of
Labor Services
•Monopolies in the output market possess
market power because they can raise prices
above the level indicated by the intersection
of supply and demand.
•Labor unions are like monopolies in that
they are able to command a higher price for
their output by….
–Reducing the supply of labor.
–Eliminating competition for jobs among workers.
–Monopolizing the supply of labor services.
©2004 Prentice Hall Publishing
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Bilateral Monopoly
o A bilateral monopoly occurs when a monopsony
buyer of labor’s services must obtain those
services from a monopoly seller, such as a labor
union.
o Under a bilateral monopoly, the wage rate
depends on bargaining power…
o Depending upon whether the employer or
representative of the employee bargains more
effectively, the wage result can be above or below
equilibrium.
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22.4
THE EMPLOYMENT OF OTHER
INPUTS
The marginal revenue product can be
calculated for any input, as can its
marginal cost.
The rule for the profit-maximizing
amount of labor applies to other inputs:
Employ an input up to the point where its
marginal revenue equals its marginal cost.
©2004 Prentice Hall Publishing
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The Marginal Revenue Product of
Capital
8
The
marginal
revenue
product
A
firm
employs
capital
to
of capital
computed
the
pointiswhere
the in the
same way as
marginal
revenue
marginal
revenue
product
product
of labor.
But the
in this
from
capital
equals
case, the quantity
marginal
cost ofof
capital.
capital
varies and the other inputs are
held constant.
6
Marginal cost
of capital
$
Marginal product revenue
12
10
•
4
2
0
0
1
2
3
4
5
6
Quantity of capital
©2004 Prentice Hall Publishing
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27
22.5 EXPLORE & APPLY
Internationalizing the Work Force
A portion of U.S. imports are made by foreign
firms employing foreign workers, but some imports
are made by U.S. based multinational firms.
Workforce diversity is the norm in many countries.
Some U.S. employers hire foreign born workers
because they claim that they will do the jobs that
American workers will not do.
Self employed entrepreneurs who are foreign born
add add another dimension to the Internalization of
the work force.
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Internationalizing the Work Force
U.S. EMPLOYMENT-BASED IMMIGRATION
YEAR
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
©2004 Prentice Hall Publishing
NUMBER OF IMMIGRANTS
58,192
59,525
116,198
147,012
123,291
85,336
117,499
90,607
77,517
56,817
107,024
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Terms along the Way
derived demand
purely competitive labor market
marginal revenue product of labor
marginal cost of labor
monopsony
monopoly
bilateral monopoly
©2004 Prentice Hall Publishing
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Test Yourself
1. A labor market demand curve is
a. downward sloping like the demand
curve for goods and services.
b. upward sloping.
c. horizontal.
d. vertical.
©2004 Prentice Hall Publishing
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Test Yourself
2. Which defines the marginal revenue product
of labor?
a. Change in total revenue/change in output.
b. Change in total revenue/change in labor.
c. Change in marginal revenue/change in the
wage rate.
d. Change in output/change in input.
©2004 Prentice Hall Publishing
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Test Yourself
3. A marginal revenue product curve
shows
a. a firm’s labor market supply.
b. a firm’s labor demand.
c. the market supply.
d. the marginal cost of labor.
©2004 Prentice Hall Publishing
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Test Yourself
4. The marginal cost of labor equals
a. the change in total cost/the change in
output.
b. change in total cost/change in labor.
c. change in total cost/change in the wage
rate.
d. change in output/change in labor.
©2004 Prentice Hall Publishing
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Test Yourself
5. The marginal cost of labor for a wagetaking firm ________ as it hires more
labor.
a. increases.
b. decreases.
c. remains constant.
d. first increases, then decreases.
©2004 Prentice Hall Publishing
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Test Yourself
6. In a purely competitive labor market
the market wage is determined by
a. the demand for labor.
b. the supply of labor
c. both the demand and supply of labor.
d. neither the demand nor supply of labor.
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The End!
Next Chapter 23
“Earnings and
Income
Distribution"
©2004 Prentice Hall Publishing
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